Solid Performance with Robust
Risk Management

• Low absolute return volatility
• Preservation of capital
• Consistent outperformance of a fixed income benchmark

In managing all of our fixed income portfolios and products, we adhere to a set of core philosophical tenets. These philosophies have been in place since our inception, and we consistently apply them. While our philosophy remains constant, as technology and markets evolve we re-exam the processes by which we execute this philosophy.

• We emphasize fundamental, bottom-up research as our primary tool to add value. This approach, and our comparatively modest size, has enabled us to produce competitive returns at low relative standard deviations.
• The macro elements of fixed income investments (interest rates, sector spreads, etc.) revert to a long-term fundamental average or mean.
• We seek to add value across a wide variety of sectors and issues, and often exploit areas of the market that are overlooked by other managers.
• Short-term technical factors can cause fixed income pricing to temporarily dislocate from equilibrium. Consequently, we tend to increase our exposure to an out-of-favor issue or asset class in response to an adverse movement in price. In this way, we can prudently lower the overall cost basis of a position via the well understood process of dollar cost averaging.
• Bottom-up issue selection, when used in combination with top-down investment strategies, can lead to strong absolute risk-adjusted returns.
• We are an active fixed income manager, and as such we take active management, non-benchmark positions. We make value-driven tactical and opportunistic investments.
• Given our comparatively modest asset base, we are generally able to construct portfolios with less systematic market risk exposure and more idiosyncratic, issuer-specific exposure. We view this as a significant advantage, as historically this approach has worked well in down markets by producing a pattern of returns less correlated with our major competitors. Of course, past performance is no guarantee of future results.
• We use a value-oriented approach and appreciate the mean-reverting nature of fixed income instruments. We believe significant alpha can be generated by applying fundamental research to identify securities whose market prices temporarily do not reflect fair value. We do not believe it necessary to routinely take significant positions or risks relative to our outlook on macro factors (such as duration).
• Market volatility often leads to attractive values because securities are sold for non-fundamental reasons. In a measured, disciplined fashion, MetWest attempts to capture the value opportunities often presented by such volatility.
• We are not anchored to benchmarks. We constantly monitor our active risks relative to benchmarks, but our construction process is based on independent assessment of value and absolute risk, not tracking error limits. We seek to provide clients with predictable absolute volatility, and our portfolios consistently produce low relative standard deviations.
• We employ a collaborative approach to the management of fixed income assets. Our entire investment management team of over 30 professionals is large enough to identify and seize opportunities, but small enough to sit together in one large trading room. We have one coordinated and collaborative team, not multiple trading desks or competing internal profit centers.

Our approach to risk management is rooted in our belief that a thorough understanding of the fundamental risk characteristics of each individual security is critical to controlling portfolio volatility. Thus, we focus on quantifying prospective downside volatility at the security and portfolio levels through stress testing and scenario analysis. We seek to avoid issues where downside volatility is extreme or difficult to quantify, and limit position sizes according to expected worst-case volatility, and in most cases we limit non-government position sizes to 2.5%. Similar to our approach to individual issues, we perform exhaustive scenario analysis at the portfolio level.

The following PDF provides additional details about our approach to risk management:

MetWest Risk Management (PDF)